Econometrica: Apr, 1961, Volume 29, Issue 2

Aggregation of Variables in Dynamic Systems

https://doi.org/0012-9682(196104)29:2<111:AOVIDS>2.0.CO;2-Z
p. 111-138

Albert Ando, Herbert A. Simon

Previous studies have examined dynamic systems that are decomposable into independent subsystems. This article treats of systems that are nearly decomposable--systems with matrices whose elements, except within certain submatrices along the main diagonal, approach zero in the limit. Such a system can be represented as a superposition of (1) a set of independent subsystems (one for each submatrix on the diagonal) and (2) an aggregate system having one variable for each subsystem. This superposition separates short-run from long-run dynamics and justifies the ignoring of "weak" linkages in partial equilibrium studies.